Has Gold Started to Respond to US Dollar Price Moves?

A US dollar rally seems likely in the short term, and this will probably have a very negative impact on the precious metals.

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Yesterday, gold climbed up to over $1,347 per ounce after the US dollar slipped against other currencies. The American currency dropped to a one-month low slightly below 82 after extending a broad decline for a third session. Investors are probably wondering if it will drop any further.

The recent price action suggests that market players are still long the dollar, which could weigh on the greenback, said Hiroshi Maeba, head of FX trading Japan for UBS in Tokyo.

What if he is right? Will the buyers manage to push the USD Index higher? What impact could such action have on the gold's chart? Could it trigger a correction?

Today, gold slipped as investors took profits after a sharp four-day rally which pushed prices up to a one-month top in the previous session. Can the yellow metal climb higher in the near term? Is the final top already in? Can we find any guidance in the charts?

In today's essay I will examine the US Dollar Index once again and the gold chart from the perspective of the Australian dollar to see if there's anything on the horizon that could drive gold prices higher or lower shortly. We'll start with the USD Index very long-term chart to put this gold chart into perspective (charts courtesy of http://stockcharts.com).

As we wrote in our essay on gold, stocks and the dollar on July 22, 2013 (see Gold's Relationship With US Currency and Stocks): The situation in the long-term chart hasn't changed recently. The breakout above the declining support/resistance line (currently close to 79) was still not invalidated.

From this perspective the situation remains bullish.

Now, let's zoom in on our picture of the USD Index and see the medium-term chart.

When we take a look at the above chart we can see that the USD Index has declined once again. Despite this fact, the recent declines haven't taken the index below 81, so the medium-term uptrend is not threatened. The reason for this is that the medium-term support line hasn't been broken, in fact, it hasn't even been reached.

From this perspective, the situation remains bullish, and we can expect the dollar to strengthen further in the coming weeks.

Now, let's check to see if the short-time outlook is also bullish.

It is. From the short-term perspective, we see that earlier this week, the US dollar dropped slightly below the 61.8% Fibonacci retracement level based on the June - July rally. It also declined to slightly above 82 on an intra-day basis on Tuesday. The move below this level is not confirmed, however.

Moreover, when we factor in the Fibonacci price retracement based on the entire February - July rally, we see that the USD Index moved to the 50% Fibonacci retracement level which is at the 82 level. In fact, the existence of this level might explain why dollar moved slightly below the short-term 61.8% retracement.

All in all, from the price perspective, it still seems that a rally will follow.

The most important factor on the above chart supporting the bullish case is the cyclical turning point which is in play right now. It's quite possible that we will see its impact on the dollar this week, and this can lead to a bigger pullback. This provides us with strong bullish implications from this perspective.

Combining both perspectives, a move to the upside is still likely to be seen. If the buyers manage to push the USD Index higher, we might see an increase to the level of the June top or even to the rising resistance line based on the May high and June peak before another pause is seen. Taking a look at the long-term charts, however, we see that the next significant resistance is currently close to 86 (86.4) – the declining red line in the chart.

Consequently, from the short-term perspective, we see that the recent decline still seems to be a countertrend bounce. When we factor in the cyclical turning point, we could see another rally soon. Taking a look at medium- and long-term charts, both outlooks for the dollar remain bullish. This is a bearish piece of information for metals and miners.

To make the US dollar perspective complete, let's analyze the impact of the American currency upon the precious metals sector. Let's take a look at the Correlation Matrix (namely: gold correlations and silver correlations).

We have seen negative correlation between the metals and the USD Index. Taking the short-term, bullish outlook for the USD Index into account, the implications for gold, silver, and the mining stocks are clearly bearish at this time.

Once we know the current situation in the US currency and its impact upon the metals, let's turn to our final chart. Today, I would like to present you with an interesting chart which may provide important clues about gold's further price movements: the chart of gold from the perspective of the Australian dollar.

Click to enlarge

On the above chart, we see that the price of gold in Australian dollars has moved up and almost reached the declining resistance line. At this point, it's worth mentioning the previous local top. We saw a pullback to this resistance line in June, but the buyers didn't manage to push gold above it. This resulted in strong declines which took the price all the way down to the April bottom area. If we see similar price action here, gold priced in Australian dollars will likely decline once again. Such a triple-bottom, in this case, would likely mean a breakdown below the previous lows in the price of gold seen from our regular USD perspective, similar to what was seen in June.

Summing up, the situation in the USD Index is particularly interesting this week. Prices are close to the final Fibonacci retracement level and right at the cyclical turning point (and following a sharp decline). A rally seems quite likely in the cards for the short term, and this will probably have a very negative impact on the precious metals.

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